Since the strong pre-War rally, the markets have been in a consolidation mode. The back and fill action has had a healthy overall tone to it, with volume lighter on down days. Heavy sellers have disappeared.

Can the Markets enter a new – and higher – trading range? Several factors are on the verge of being resolved, and they will determine if the next leg is up or down. A quick look at both sides of these issues:

Positive elements for a rally are as follows

• War in Iraq was resolved quickly;
• Earnings are better than expected (so far);
• Money flows into equity mutual funds[2] have flipped from negative to positive over the past month; 4th consecutive week of inflows (versus outflows) to stocks;
• Money Market funds report outflows of $47.1 billion;
• Heavy short interest — especially in NDX names — is potential near term catalyst;
• NDX and S&P at or above their 200 day moving averages.

Risk factors which could derail any moves up:

• Continued geopolitical fallout from the mid-East;
• Relatively high valuations (30 times P/E for S&P500[3]);
• Expectations have been lowered dramatically – so beating numbers isn’t all that significant;
• Consumers potentially tapped out as mortgage refinancing boom tapers off;
• Corporate spending still not visible on the horizon;
• Increasing Federal deficits threaten low rates;
• Taxable Bond funds inflows were ten times higher than equity flows;
• Bull/Bear ratio shows too many bullish people – no wall of worry for the market to climb;
• The markets are approaching the top end of the trading range, with significant resistance ahead at S&P 900-905 and NDX 1085-1100.

In this fairly balanced tug of war, 2 factors will likely tip the scales. The first is psychology, especially amongst the fund managers. Their palpable fear of missing rallies has them deploying capital first, and asking questions later. This lends a slightly bullish tint to the overall landscape.

The 2nd is the internals; They have been constructive over the past month. Up/down volume and the advance/decline lines are no longer distributive. This also has a bullish hue.

The path of least resistance – at least for the next few weeks – appears to be upwards.